Private equity funds: A complete guide for investors

Private equity funds are financial vehicles that give investors access to exclusive opportunities, often in unlisted sectors or specific projects. These investment funds can offer attractive potential returns, but their complexity and associated risks require particular attention. In this article, we will explore the main advantages and strategies of private equity funds, while addressing the risks to consider before investing.

Private equity funds offer investors an alternative to traditional stock market investments. However, they have specific characteristics that set them apart and merit closer examination.

Access to exclusive opportunities

Private funds provide access to investments in private companies, property projects or specialist sectors that are not accessible via the public markets. This enables investors to diversify their portfolios with assets that are less sensitive to fluctuations in traditional stock markets.

Diversification and risk reduction

Investing in private equity allows you to diversify your portfolio beyond listed equities and bonds. This diversification, especially into emerging sectors or specific projects, can reduce exposure to the volatility of traditional markets, although it does not eliminate the inherent risks.
 

There are several types of private equity fund, each with distinct objectives, strategies and investment sectors.

Private equity funds

Private equity funds, or private equity, are funds that invest in private companies, often in a growth or restructuring phase. The aim is to support a company as it develops, transforms or prepares for a sale or flotation. They can also be used to turn around companies in difficulty. Eurazeo, a key player in this field, stands out for its ability to identify and support innovative projects. Investing in these funds makes it possible to diversify a portfolio and participate in impact projects, while benefiting from a high potential return.

Venture capital funds

A sub-type of private equity are venture capital funds, which focus on investments in start-ups or young, innovative companies with high growth potential. These funds are particularly risky, but can offer very high returns if the companies in which they invest are successful.

Private debt funds

These funds invest in loans or bonds issued by private companies. Rather than investing in shares, these funds lend money in exchange for interest payments, with an expected return based on the strength of the borrowing company. They can also be involved in specific financing, such as loans to companies in difficulty or with high potential.

Private real estate funds

Property investment funds specialise in property investments, whether in the form of project development (residential, commercial, industrial) or the acquisition of existing properties. The aim is to generate regular income by renting or to realise capital gains by reselling or increasing the value of the property.

Mutual funds (FCP)

Mutual funds pool investors' capital to invest in a diversified portfolio of assets. They enable risks to be pooled while providing access to diversified opportunities.

Innovation mutual funds (FCPI)

FCPI focus on innovative companies, particularly in the technology and science sectors. They offer tax advantages to investors while supporting French innovation.

Venture Capital Funds (FCPR)

FCPRs target private or growth-stage companies. Although risky, they can generate high returns by capitalising on the development or restructuring of the companies in which they invest.

Although private funds can be attractive, it is essential to fully understand their benefits in order to assess whether they match your investment objectives.

Potential for high returns

Private equity funds are perceived as offering the potential for higher returns than traditional investments, thanks to access to fast-growing companies or innovative projects. However, these returns are not guaranteed, and performance may vary depending on the underlying assets.

Flexibility in investment strategies

Private funds offer flexibility in investment management. Managers can adjust the investment strategy according to market opportunities, selecting illiquid assets or companies with high growth potential. However, active management requires expertise and carries risks.

Access to high-level expertise

Private funds are managed by specialist teams with in-depth expertise in their field. These managers draw on their experience to identify high-potential opportunities and minimise risk. This professional management is one of the major assets of private funds, but it does not eliminate the risks associated with investing.

Private funds are generally made up of several investors who contribute capital to a pooled fund managed by a team of experts. These funds can invest in a variety of sectors, from private companies to real estate projects, and have long investment horizons, often of 5 to 10 years.

Structuring and types of fund

There are several types of private equity fund, including private equity funds, private debt funds and real estate funds. Each type of fund has its own specific features and investment strategies, and can be more or less risky depending on the underlying assets and the management structure.

Investment horizon and liquidity

Private equity funds generally have a long-term investment horizon. It is important to note that liquidity in these funds is often limited, and investors may not be able to access their capital before the expected exit period, which can last several years.
 

Private equity funds can adopt a variety of investment strategies depending on their objectives, the opportunities available and the needs of investors.

Investing in growth companies

Some private funds target growth companies, particularly start-ups or innovative companies. These investments can offer high returns, but also carry a higher risk due to the uncertainty surrounding the development of these companies.

Value Investing strategy in mature companies

Other funds favour a value investing strategy, seeking to invest in undervalued mature companies. These funds aim to buy companies whose value is perceived to be below their long-term potential, in the hope that they will recover and generate attractive returns over the long term.

Diversification through multi-sector investments

Some private equity funds adopt a diversification strategy by investing in different economic sectors. This approach aims to limit risk by spreading investments over several areas, such as technology, healthcare or property, in order to benefit from growth in a variety of sectors while reducing the impact of market fluctuations.
 

Private equity funds offer many advantages, but they also entail significant risks that investors need to assess before taking the plunge.

Liquidity risk

One of the main risks of private equity funds is lack of liquidity. Unlike listed equities, it can be difficult to sell units in a private fund before the planned exit period, which can restrict access to capital when needed.

Market and sector risks

Private funds are exposed to fluctuations in the markets and sectors in which they invest. For example, a property fund could be affected by falls in property prices, while a fund focused on growth companies could be impacted by the failure of certain companies to reach their market potential.

Management risks

The performance of a private equity fund depends largely on the skill of its management team. Inappropriate asset management or a misdirected strategy can be detrimental to the fund's performance. It is therefore essential to fully understand the management strategy before investing.

This article was produced by Eurazeo Global Investor and is for information purposes only. It should not be construed as a solicitation or offer of any financial products or as legal, tax, financial or other advice. Readers are invited to contact their own advisors for any analysis relating to the content of this article. The information presented does not claim to be exhaustive. Accordingly, this document alone should not be relied upon in making an investment decision. Please refer to the legal documentation of the funds mentioned before making any final investment decision.

Past performance is not necessarily indicative, nor a guarantee of future results. Information on past investments is provided solely to illustrate the nature of these investments and the related investment strategy and process. There can be no guarantee that the investments made by the funds will produce comparable results, or that the targeted returns will be achieved. Investing in Private Equity/Private Debt funds involves a risk of capital loss and illiquidity.